Onsale, Egghead.com merge in $400 million stock swap

Merger mania continues on the Internet. Egghead.com Inc. (Nasdaq: EGGS) said Wednesday that it will merge with Onsale Inc. (Nasdaq: ONSL) in a stock swap valued at $400 million.

Under the merger terms, .565 shares of Onsale will be swapped for each share of Egghead.

The new company will operate under the Egghead name and and web address with auctions and sales of surplus goods operating under the Onsale banner.

Egghead shareholders will own about 47 percent of the combined company, which will have a combined 1999 sales rate approaching $500 million based on current trends. The company also had $160 million in cash at the end of the March quarter. Most of the cash is likely to come from Egghead, which recently issued secondary stock offering. As of a May 17 regulatory filing, Onsale had $28.8 million in cash and $18.8 million in short-term investments as its plan to sell goods at wholesale cost burned through cash.

The merger is just the latest in a slew of combinations. Excite@Home's (Nasdaq: ATHM)bought iMall, DoubleClick (Nasdaq: DCLK) acquired NetGravity (Nasdaq: NETG) and Columbia House merged with CDNow (Nasdaq: CDNW). And Infoseek Corp. (Nasdaq: SEEK) was folded into the Disney empire.

Onsale, Egghead gain scale

By combining Egghead and Onsale, executives are hoping to gain the scale to compete.

The new company will boast 3 million estimated unique monthly visitors and about 2.8 million combined customer records, the companies said.

Onsale CEO Jerry Kaplan said in a statement that the merger was necessary to increase scale.

"Scale and brand matter," said Kaplan. "Our plan is simple: combine two top technology retailers to create a clear market leader; pool our marketing budgets to drive a single brand around the Egghead.com name; leverage the resulting traffic; and increase efficiency by eliminating duplicative operating costs."

Egghead CEO George Orban will become chairman of the combined company, and Kaplan will be CEO of the new company. serve as chief executive officer.

More visibility

Onsale and Egghead have both been Wall Street darlings -- at very brief intervals (comparison chart).

Over the long run, however, both companies have played second or third fiddle to larger e-tailers such as Amazon.com Inc. (Nasdaq: AMZN).

Analysts were reluctant to cover Egghead -- until the company issued the secondary offering. Egghead underwriters gave the stock a nice pop back in March as they began coverage with "buy" ratings.

Onsale has been panned of late because of its atCost business model, which translates into dwindling profit margins.

Hefty losses ahead?

Recent quarterly results indicate that the combined Egghead-Onsale will be reporting large losses.

Egghead lost $12.8 million in its fourth quarter ending April 3 and warned of seasonal slowness in the first quarter. Onsale lost $5.5 million in its most recent quarter and was hit by downgrades.

According to First Call, Wall Street is expecting Egghead to report a loss of 42 cents a share in its first quarter. Onsale is expected to lose 59 cents a share in its second quarter.